Monday, June 28, 2010

What is Economic Value?

First, we need to define the concept of value. I will summarise some of my earlier remarks. Value is the worth of something, however that is judged. Philosophers distinguish between extrinsic (= instrumental) and intrinsic value. The extrinsic value of something is its worth for the sake of something else, in the sense that it is valued because it will obtain, or allow you to achieve, some other thing or goal. The intrinsic value of something is its worth for its own sake. Yet another concept is intermediate value, which is when something has a combination of both extrinsic and intrinsic value. These concepts, however, are not what economists mean when they talk about value.

We can review the concepts of value as they are used in neoclassical and Marxist economics below:

(1) Neoclassical Economics:Use value is purely subjective. Utility is the satisfaction or pleasure derived by an economic agent (a person or a firm) from consuming a good. Utility is the measure of value. This stems from a subjective valuation of the worth of the good by an economic agent. Thus the value placed on any good can, and often does, vary from person to person. Two people can derive completely different utilities from a good that costs them the same price. Also, utility can influence the price of a commodity.Exchange value is the price that a good or service commands in the marketplace, although the price can also be affected by supply and demand. The utility of the good (and the individual subjective valuation of that good) can directly influence the price, particularly when aesthetic judgements are involved. In modern microeconomic analysis, price theory is the study of how prices are determined in individual markets. In neoclassical economics, there are two main factors affecting the price of a good: the demand side and the supply side. The demand side is essentially consumer behaviour involving individuals maximizing utility. The number of individuals who place a subjective value on a particular good can cause demand, and, along with supply, this influences the price of the good.

(2) Marxist EconomicsUse value is the objective usefulness of a good and depends on the way in which the good is used by the buyer.Exchange value is the power that something has in obtaining other goods in exchange, and it is completely independent of the use value.

In what follows, I accept the general neoclassical definitions of value, and reject the Marxist ones. Modern neoclassical economics has largely dispensed with “value theory.” As I. A. Kerr has pointed out,

[m]ore recently, the attitude of neoclassical economists to the value/price distinction has been one of indifference, rather than hostility … value theory is virtually synonymous with price theory and many economists would be hard pressed to explain the difference between the two. In fact, the two terms are widely conflated by neoclassical economists (Kerr 1999: 1218).

Post Keynesians, as far as I can tell, have not been concerned much with the general concept of “use value” in the subjective sense either (perhaps I am wrong), although Post Keynesian economics does have strong criticisms of the diminishing marginal utility theory (Keen 2001). Post Keynesianism departs from neoclassical theory in adopting a synthetic theory of prices that combines both classical cost of production ideas and neoclassical price theory (Kerr 1999: 1218). Thus Post Keynesian price theory is an essentially empirical discipline, and seeks to find the causes of price in analysis of modern economies and production.

If we are talking about “use value,” then the idea that the value placed on a commodity is fundamentally subjective seems reasonable to me. If value is subjective, then it does not always come from one specific or more objective and consistent sources (say, like labour).

In modern mainstream economics, “exchange value” is the price of the good or service in the market place. Supply and demand clearly do influence price. But there is clearly another factor that also fundamentally explains the average, long-run price of many goods. This is the total cost of factors of production, which are:

Post Keynesian economics stresses that we live in a monetary production economy, so that credit money is also a fundamental prerequisite for production. Credit money could even be regarded as a factor of production, although I will put this point aside for the moment.

It is clear that the price of many goods sold for profit must be above the total costs of all these factor inputs. That is, the total costs of the factors of production plus the markup explains the general price. Of course, if there is no demand for the good or little demand, then that will influence the price too, but unless the producers of the commodity sell without profit, they must have a price above the total factor costs.

Addendum: A Subjective Labour Theory of Value?

The blogger Cynicus Economicus has proposed a novel theory of value that might be called a “subjective labour theory of value.”

He states

The first point to make is that all economic activity is rooted in the value of labour. A commodity such as gold only has value once labour has dug it from the ground, and labour has moved it to the surface. Once it arrives at the surface it will be some form of labour that is utilised to move it to where it is next utilised …. At the heart of all economic activity is human labour, and economics is the process of exchange of value of labour between individuals, organisations and other economic units. Within this system of exchange of value of labour, the underlying purpose of money is very clear. It should only act as a medium through which the value of labour might be accounted, and is always representative of a store of value of labour, with an underlying contract that it might, at some future point in time, be exchanged for the value of labour of others. Any system of money should seek to represent the value of labour in a way that is both fair and stable, such that the underlying contract is met regardless of elapsed time. Such a system implies that the value of money should be a neutral token to be used in the exchange of value of labour, such that it offers a fair exchange as determined by how individuals and organisations value the labour of each other. The purpose here is not to discuss the rights and wrongs of how one person’s labour might be valued against another, which is a debate about social justice, but rather to identify that all economic activity is the exchange of value of labour.

The idea that a person can in some cases subjectively value labour when buying a commodity is coherent and convincing. I do not question it.

However, the idea that all value judgements made by consumers when purchasing commodities are simply derived from a subjective valuation of labour does not follow.

One can also note that the very definition of value used above is not properly defined. It is “use value” or “exchange value”? (note that “use value” is not the “price” of a commodity).

If we assume that it is “use value,” then “use value” is the subjective worth of a commodity to an agent. The worth is measured by utility. The “utility” is the satisfaction or pleasure and the degree to which we are satisfied by the commodity. The source of how and to what extent we are satisfied by a commodity could come from one, two or multiple causes. A subjective theory of value commits you to the view that there is no universal objective source of “worth” or the way in which we measure worth.

If “use value” is the sense intended in “subjective labour theory of value”, then a serious problem is obvious: if I purchase a pearl at a market, I do so because I find the pearl aesthetically pleasing. I have no interest in the subjective value of the labour it took to bring the pearl to market (about which I know nothing anyway), and a subjective “labour valuation” is utterly irrelevant to the question whether I find it aesthetically pleasing or not. I purchase the pearl for subjective reasons other than a subjective valuation of labour.

A “subjective valuation of labour” simply does not occur in many purchases of commodities. You cannot claim that “use value” is subjective in the sense I have described above, and then claim that value nevertheless will only ever come from a subjective valuing of underlying labour.

Now we come to the definition of money in this “subjective labour theory of value”:

Within this system of exchange of value of labour, the underlying purpose of money is very clear. It should only act as a medium through which the value of labour might be accounted, and is always representative of a store of value of labour, with an underlying contract that it might, at some future point in time, be exchanged for the value of labour of others.

Since money can only act as “a medium through which the value of labour might be accounted” in the actual money price of commodities (or perhaps even assets) sold on the market, this requires a definition of value that equates value with the “money price a commodity obtains in the market place.” In other words, Cynicus is using the concept of “exchange value” here.

But it is simply not possible to argue that the “money price” of commodities is only derived from subjective valuation of the underlying labour. Demand (through subjective valuation) is only one side of price. As we have seen above, the average, long run price of a commodity tends to be also strongly related to the total costs of factors of production plus the mark-up. Labour is one factor of production. We cannot explain price by appealing to a “subjective labour theory of value.” It follows that the idea that money is only a “medium through which the value of labour might be accounted” is also wrong.

BIBLIOGRAPHY

Keen, S. 2001. Debunking Economics: The Naked Emperor of the Social Sciences, Zed Books, London and New York.

Kerr, I. A. 1999. “Value foundation of Price,” in P. A. O’Hara (ed.), Encyclopedia of Political Economy, Routledge, London and New York. 1217–19.

Lowe, A. 1981. “Is Economic Value Still a Problem?,” Social Research 48.4: 786–815.